Consider the following information about Stocks I and II:

				Rate of Return If State Occurs
State of	Probability of
Economy	State of Economy			Stock I			Stock II
Recession		.25			.05			.36
Normal		.45			.20			.08
Irrational exuberance		.30			.11			.46

The market risk premium is 8 percent, and the risk-free rate is 4 percent.

The standard deviation on Stock I's return is ______ percent, and the Stock I beta is_______ .

The standard deviation on Stock II's return is_____ percent, and the Stock II beta is____ .

Therefore, based on the stock's systematic risk/beta, is Stock I or Stock II "riskier"?

2. Suppose you observe the following situation:

Security	Beta			Expected Return
Pete Corp.		1.25			.135
Repete Co.		.94			.108

Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market?

Expected return on market

%

What is the risk-free rate?

Risk-free rate

%